Word Games

Meetings & Conventions - Change of Plans - February 2002 Current Issue
February 2002
Sign here: Hotels are simply saying "yes" to contract addendums, finds Judith Ackerman, event planner for Guy Carpenter & Co. in New York City.

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Word Games

How planners are rewriting force majeure, attrition and cancellation clauses

Is t’s a new era for meeting planners; today, the old contracts are insufficient. Planners and their lawyers are penning creative phrases to more clearly define acts of God, and they are tweaking attrition and cancellation clauses to provide deeper levels of protection.

And, while hotels might balk, they will have to share a greater burden of risk to win group business, says John Foster, an attorney with Atlanta-based law firm Foster, Jensen & Gulley. “I’m starting to see planners walk away from hotels that are being inflexible,” he says.

Many properties are obliging. “I haven’t been more aggressive in my negotiations, but just yesterday my entire two-page addendum was accepted,” says Judith Ackerman, an event planner for Guy Carpenter & Co. in New York City. “Typically, the hotels will say ‘no’ to two or three bullet points, but now I’m finding that people will just return my contracts, signed as is.”

Yet cash-strapped hotels can only be pushed so far. “Groups were trying to use the events of Sept. 11 to get out of contracts when it wasn’t appropriate to do so,” says Lisa Sommer Devlin, hospitality industry lawyer with Kurtz Sommer Devlin in Phoenix. “My hotel clients have reviewed their standard clauses and are sticking by them.”

Changes in the economy or in corporate travel policies are not the hotel’s burden, insists David Scypinski, senior vice president of industry relations for Starwood Hotels & Resorts in White Plains, N.Y. “If you have commitments, you can’t say, ‘I’m not paying because we have a new travel policy.’ If you reduce your travel and that causes people not to attend your meeting, I’m sorry. You’re still going to have to pay,” he says.

Fair contracts should withstand economic twists and turns, says Steven M. Rudner, principal of Rudner Law Offices in Dallas. “If we’ve done our job correctly, the terms should be usable in a good economy and a bad economy.”

Ideally, both parties should share the risk equally. “If a group cancels, our hotels are taking a hit and our customers are taking a hit. That’s the basis of all our contracts,” says Larry Luteran, vice president of industry relations for Chicago-based Hilton Hotels Corp.

But for the buyer who wants legal protection in uncertain times, and for the supplier who is desperate to protect an already-suffering business, coming to acceptable terms is increasingly challenging. Here’s where both sides stand on some of the most critical clauses in today’s hotel deals.

Force majeure
Perhaps the most debated paragraph in any post-Sept. 11 agreement is the force majeure, or acts of God, clause. Historically, it was a protection against nature hurricanes, floods, snowstorms or other uncontrollable events that made it impossible for either party to fulfill a contractual agreement. Labor strikes, the cessation of transportation or the outbreak of war might also be cited in the clause.

The latest debate: While the Sept. 11 attacks were not caused by a force of nature, terrorism can be similarly unforeseeable and devastating. “I read that when the World Trade Center collapsed, the force was so great it generated a reading on seismographs,” says Henry Schaffer, an attorney with Howe & Hutton Ltd. in Chicago. “That is a perfect illustration of an event that is not an act of God but has the same calamitous results of an earthquake.”

Yet, only a small portion of meetings affected by the attacks would have been covered under force majeure. The traditional wording of the clause refers to acts that make performance “impossible” or “illegal.” Only meetings scheduled within a narrow time frame after Sept. 11, when air travel was halted or severely limited, would have been technically impossible to hold, says Schaffer.

While some force majeure clauses do specifically cover war, gray areas remain. “Does the war against the Taliban in Afghanistan have anything to do with the Moscone Center in San Francisco?” asks James Seely, legal counsel at Meetings Legal Services in San Francisco.

The critical question, says Sommer Devlin, is, “What is a threat of war, and when does it make it impossible to have a meeting?”

“It’s not so much the language, it’s defining when an act of God occurs,” says Fred Shea, vice president, sales operation, for Hyatt Hotels and Resorts in Chicago. “When does that inability to perform kick in?” he asks.

Planners’ tactics: Many lawyers are finding ways to couch the word “impossible” in vague terms to broaden protection for meeting planners. For example, in late September and through October, while it technically was not impossible to fly, many businesses had restricted or prohibited travel. And a number of would-be travelers were justifiably afraid to fly.

Foster’s solution is to use terms like “temporary impracticality” and “partial impracticality” in the force majeure clause. This lets groups “suspend” their contracts until the ability to perform returns to normal levels, or excuses them from performance of the “total contract” if they are “partially prevented” from meeting the terms. “If 50 percent of attendees can show up, you should try to hold the meeting but then be excluded from responsibility for the other 50 percent,” says Foster.

Likewise, Joshua L. Grimes, owner and principal of an eponymous practice in Philadelphia, is making sure terrorism and acts of war provisions are in his clients’ contracts. Also, events that not only make it impossible but “illegal” or “impractical” to fulfill the contract are covered under force majeure. “That’s a catchall to cover anything that would prevent attendees from coming to the meeting,” says Grimes. Hoteliers might not like this broad phrasing, he admits. In fact, Grimes adds, “If I were representing a hotel, I might have difficulty with that provision.”

Hoteliers’ response: “There’s a tendency for planners to try to develop clauses that cover every bad thing that could possibly happen. We think that’s dangerous,” says Hilton’s Luteran. “It results in a lot of ambiguity.

“If a company that is trimming expenses decides to cancel a meeting, that’s a financial decision,” Luteran adds. “The formula in the contracts allows them to figure out how much it would cost to cut a meeting in half or cancel it, so they can determine whether it makes sense to do that. It’s not reasonable to expect the hotel to absorb the loss.”

“‘Impractical’ is a word that leads to dispute,” adds Starwood’s Scypinski. “It’s subjective each party has a different thought on what it means. ‘Impossible’ or ‘illegal’ are very clear. Whenever I see ‘impractical,’ I always cross it out.”

Caveat to consider: Even if the hotel does agree to broaden force majeure, vague wording puts the planner at some risk, points out Kim Zeitlin, a meetings industry attorney based in Washington, D.C. Zeitlin uses the phrase “illegal, impossible or impractical” in contracts, but the provision is a two-way street. While the wording allows planners greater flexibility to cancel without penalty, the hotel can turn around and do the same. If, for instance, an incident happened at the property that shut down its food service, the hotel might call the event “impractical” and decide to cancel it.

Attrition
Not all hotels waived attrition fees last fall. Countless groups slapped with penalties are now fighting the charges. And, given the shaky economy, planners are worried about attrition at future meetings.

The latest debate: Foster is fielding calls from people “in tears” who are looking at astronomical fees $200,000 to $300,000. But their meetings suffered because of the economy and not directly from the attacks, says Foster. “There’s not much I can do,” he adds.

Similarly, in early October, one of Schaffer’s clients held a meeting where only 50 percent of attendees showed up. The planner is blaming Sept. 11; the hotel rep says that is just an excuse.

“Lots of people have never seen this kind of market,” says James Goldberg, attorney with Goldberg & Associates in Washington, D.C. “People say to me, ‘Why doesn’t the hotel understand? Why aren’t they willing to work with me and waive their attrition?’ My response is, ‘Why should they? You signed a business deal.’ Although I represent planners, you have to be somewhat realistic here.”

Planners’ tactics: Past events might only be settled in court or with a large check, but for future meetings, changes are being made to attrition clauses. Zeitlin recommends asking for greater flexibility to adjust room blocks both before and after the cutoff dates. These numbers had shrunk when the hotel business was booming and hotels became stricter on the number of rooms that could go unsold without charges being levied. Now, planners should ask for higher slippage percentages before and after the cutoff date, he says.

That strategy is working for Guy Carpenter’s Judith Ackerman. “Hotels are more willing to offer higher rates of attrition,” she finds. “Typically, it was 10 percent; now it’s 25 percent.”

Foster advises clients to negotiate attrition on the hotel’s average occupancy for the time of year the meeting is taking place. For example, a July meeting held in Scottsdale should have an attrition clause based on 60 percent occupancy, not 80 percent. “It’s not realistic to expect the hotel will sell out,” says Foster, “so why should anybody have to pay for those empty rooms?”

Another variation asks the hotel to substantiate that it turned away business because rooms were being held for the planner’s block. Hotels often keep reports on what business has been declined and why, says Foster. He recommends that planners get written permission in the contract to review these reports and even to call travelers who were turned down by the hotel. “If you booked 100 rooms and then canceled them, but the hotel never got inquiries for those dates, then they never turned away any business,” says Foster, who began adding the provision in the fourth quarter of 2001. “Planners really need to think defensively, because hotels are thinking defensively,” he adds.

Goldberg urges clients to plan for poor attendance. Reduce the room block or expect a flat attendance growth if your numbers typically increase from year to year. “I’m saying to clients, ‘Be absolutely sure about your room block before you commit. Don’t predict drastic increases if you can’t justify it.’”

At press time, one of Goldberg’s clients was anticipating a major attrition penalty on a meeting set for early 2002. The hotel was refusing to back down on the charges, although the contract makes it less expensive for the planner to cancel the event than to hold a poorly attended meeting. It also allows the group to bow out up to a year in advance with no penalty. The group has contracts in place at the same hotel for meetings in 2003 and 2004.

The planner could pay the cancellation penalty for the 2002 event but threaten to pull all future business unless a deal on attrition can be worked out for 2002, says Goldberg. Playing dirty? Perhaps. But, Goldberg asks, “What’s more important, $200,000 or making nice with a hotel representative?”

Hoteliers’ response: A year ago, planners might have been more willing to take what they could from the hotel, especially if the dates were important, says Hyatt’s Shea. “With the new economics, how can I predict who will show up?” he asks. Shea says Hyatt is working on revising its standard contract; the new document will have a minimum attrition standard, so that once the opportunity to resell unused rooms is past, both sides will have a place to start in calculating the hotel’s lost profit.

“We want to simplify how you get to that number, and ultimately [the attrition agreement] becomes a negotiation of that number,” Shea says. The objective, he adds, is that “in as few sentences as is possible, everybody understands where the point of risk is for both parties.”

Planners who offer to replace lost business might succeed in reducing their attrition penalties. “We’re always willing to work with customers on that,” says Shea. “We want the repeat customer.”

Cancellation
A meeting is a business deal, and the cancellation clause requires either party to pay a price for breaking the deal.

The current debate: “People make bad business decisions all the time and get stuck with them,” says Goldberg. “Meeting planners are no different.” But it’s a frightening prospect in uncertain times, and a number of organizations are looking for ways to minimize the risk of that commitment.

Planners’ tactics: Foster recommends contract language allowing groups to change the dates of a meeting without penalty if certain criteria are met. Such criteria might include a deadline for cancellation and a requirement that the group rebook within six months, for instance. This would be treated as a date change, rather than a costly cancellation and rebooking.

Hoteliers’ response: A deal is a deal; hoteliers don’t want an agreement that offers an easy out. “If an organization chooses to cancel after making a business decision, we already have in our contract a price that both parties can walk away at,” says Shea of Hyatt.

“A cancellation clause isn’t about the money,” adds Starwood’s Scypinski. “It’s about the commitment the organization makes at the time the contract is signed.”

Caveat to consider: Sometimes, it’s wise to be noncommittal, says Foster. If the meeting is in a destination that is not likely to be too busy during the event’s dates, planners can ask for a group rate but not a room block, or they can book a very small block. “In other words,” says Foster, “you’re giving the hotel the opportunity to do the business but not guaranteeing performance. That’s how contracts were written in the ’70s and ’80s.” Of course, in this instance the planner is taking a significant risk.

Room rates
With rates dropping and last-minute fire sales, planners are finding the great rate they got two years ago isn’t so great anymore. Enter the so-called “most-favored nation” clause. Seldom used but now gaining more attention, this provision helps protect against attendees booking outside the block.

The clause says if the hotel offers a lower rate during the meeting period, the price will apply to all guests, including meeting attendees. Also, it says the group will be credited for attendees who book outside the block but at the same hotel, regardless of the rate paid or the method of booking.

Planners’ tactics: For events planned well in advance, lawyers suggest adjusting how annual rate increases are calculated. Many contracts state the group rate and allow the hotel to add a maximum yearly increase of 6 percent. “That’s an open invitation for the hotel to sock on the full 6 percent increase,” says Goldberg.

Instead, the planner should be given a choice: Pay the negotiated rate plus either the consumer price index or a set percentage rate increase agreed upon by the planner and the hotel. That way, says Goldberg, the planner gets the option of the lowest formula application.

Foster is examining ways to link future room rates to several economic indicators for example, adjusting the contracted rate according to the gross domestic product and consumer confidence levels. “I’m not sure any one scale is the final determinant,” he says. “We now use the consumer price index, but that doesn’t have anything to do with other parts of the economy. The indicators don’t all go in the same direction.”

The ideal formula, Foster says, “would solve the situation where, if you booked a year ago during a booming economy, and the economy fell and no one is coming, it would mitigate some of that responsibility.”

Hoteliers’ response: Sommer Devlin compares negotiating group room rates to buying a stock future. “You are giving your best estimate of what that rate will be, and then you’re locking in that rate.”

Scypinski agrees. “Is it fair for us to try to get them to pay a higher rate?” he questions. “We forget that at the time we negotiated the deal, we gave our best effort to come up with what, at that time, was the best package.”

Yet, if attendees find cheaper rates at the host hotel over the Internet, Scypinski says they should be counted toward the block. “The fair thing to do is to get the registration list from the group and compare it to the house,” he says.

Caveat to consider: If the hotel holds its ground on price, planners should check the rates at other area properties during the meeting dates. If attendees book across the street, both planner and host hotel stand to lose.

“The hotel should make an educated decision to maximize the group size,” says Scypinski. However, he adds, “That’s different from saying there should be a clause in the contract that covers this.”

A final note
Beware the ramifications of hardball negotiations. “It’s better to maintain a relationship than to push and push and push,” notes Scypinski.

Some planners share similar concerns. “When we contract with a hotel, we look at building partnerships; it’s important to be fair on both sides,” says Colleen Schwoerke, project manager for Raleigh, N.C.-based Professionally Planned Meetings. “We can’t just go in and twist a hotel’s arm because they need the business right now. If you twist too much, you’ll end up paying somewhere.”

WORTH ASKING FOR
The hotel business is as close to a buyer’s market as it has been for several years. And that means planners can ask for more flexibility in negotiations. Some items to add to the wish list:

Resort fees. Do you pay for popcorn at a movie whether or not you want it? Lawyers say it’s time to negotiate this one out and pay as you go for leisure activities.

Comp rooms. Typically, planners might get one free room for every 50 rooms used within the block. Try dropping that number to one comp per 40 or even 30 guest rooms.

F&B attrition. “You can refrigerate broccoli, but you can’t refrigerate a guest room,” says Kim Zeitlin, an attorney in Washington, D.C. While food and beverage attrition has become the norm, planners should be negotiating harder in this area. Certainly, don’t take responsibility for “anticipated revenue,” says Zeitlin. Instead, agree to pay for lost profit on F&B.

• CARLA BENINI

DÉJÀ VU?

This isn’t the first time in history planners have tried to broaden force majeure, says David Scypinski, senior vice president of industry relations for Starwood Hotels & Resorts. It happened in 1991, during the Gulf War. “It’s a throwback. People want to control their meeting’s destiny.” Yet, he says, “A true force majeure issue is unforeseen and can’t be prevented. It causes the meeting not to be held or the attendees not to be able to get there.”

A case filed in 1991 by the Scottsdale Plaza Resort against Kuhn Farm Machinery came to a similar conclusion. It questioned whether fear of flying during the Gulf War was reason to pull out of a contract. The case, which the resort won on appeal, didn’t rest on force majeure. The court examined two other legal doctrines, known as “frustration of purpose” and “commercial impracticality.”

“The court essentially concluded, ‘It’s a scary world we live in; one of the realities is we never know what will happen,’” says attorney Steven M. Rudner, the Dallas-based lawyer who handled the resort’s appeal. The court also found that neither of the above doctrines applies when the parties have already allocated the risk, as with cancellation and attrition clauses. “When you sign a contract that has an attrition clause, you’re saying, ‘I don’t know how many of my people will show up.’ You’re defining that risk,” Rudner says, adding, “The court wasn’t concerned with why the people didn’t go.”

• SARAH J.F. BRALEY

BASIC TRAINING
The downturn in the economy has presented a unique challenge for planners: dealing with younger hotel salespeople who arrived in the industry to overbooked rooms and now have no experience negotiating in a soft market.

A new standard contract is in the works at Hyatt Hotels and Resorts, along with a concerted training effort to bring sales staff up to speed on all of its clauses. “Our people need to be better educated on the contract,” says Fred Shea, vice president of sales operations for the chain. “Our customers might be better educated than some of the new salespeople they are working with.”

“Many people on our sales staff are unfamiliar with this type of recession. They have to learn how to compete for a piece of group business,” according to David Scypinski, senior V.P. of industry relations for Starwood Hotels & Resorts. He adds, “That’s our industry’s biggest challenge right now.”

The problem is apparent to independent planner Mark McCulley, who has worked on two major contracts in recent months. “I’ve had to go back and say, ‘This is how a contract should read,’” complains the president of Los Angeles-based Mark of Excellence Meetings and Events.

• S.B.

USING STRONG LANGUAGE

In an attempt to cover bases that six months ago might have been unimaginable, here’s how some planners are making changes to future contracts.

Adding “terrorism” to force majeure. This is a current consideration for Colleen Schwoerke, project manager for Raleigh, N.C.-based Professionally Planned Meetings. “We need to make sure it stands up contractually and that, when we go into negotiations with a property, we can explain why we have it. It has to have logic behind it,” she says.

Easing attrition. “The new wrinkle is going to be to predict how many people are actually going to come to an event,” says Michael Key, director of meetings and incentives for Monumental Life Insurance Co. in Durham, N.C. “We’ll try to ask for more liberal attrition clauses. Absolutely.”

Averting major slippage fees. “I like to state in the contract that if, for example, only 50 percent of the attendees can make it, I have the option to cancel and pay the price, or recalculate the attrition,” says Michele McDermotte, CMP, meeting manager for the Strategic Research Institute in New York City.

Allowing for date changes. “We negotiate a clause that allows a client to move the meeting if they have to reschedule it. If the group reschedules it in three months, there won’t be a cancellation fee,” says Schwoerke.

• BRIAN ORSAK